Source: Moody's (2021)
The financial performance (the risk-return profile) of infrastructure investments is a critical determinant of private capital investment in infrastructure as an asset class. In the case of infrastructure debt, the return on investment is both attractive and resilient.
Infrastructure debt, which accounts for about 80% of infrastructure investment, provides a highly attractive risk-return proposition in the financial markets for fixed-income securities (loans and bonds). Over the preceding decade, infrastructure debt provided an average annualised return of 6% at an average annualized risk of 3.3% (measured by standard deviation of returns). In comparison, government bonds issued by developed economies like the United States, Canada, and England provided an average annualised return of 1.3% to 2% at an average annualised risk of 2.1% to 2.9%. With just slightly higher risk, infrastructure debt provided more than three times the return provided by these government bonds.
Default rates indicate infrastructure debt performs better than non-infrastructure debt, especially in high-income countries. Based on a representative sample of infrastructure debt that originated from 1983 to 2019, the average cumulative default rate of infrastructure debt was 5.4% over a 20-year period, significantly lower than the cumulative default rate of 8.2% for non-infrastructure debt. Infrastructure debt in high-income countries had an average cumulative default rate of 5.2% over a 20-year period, while the same was 7% for middle- and low-income countries.
Data on recovery rates also point to the attractiveness of infrastructure debt investments. Recovery rates following defaults are very high for infrastructure debt in high-income countries (81.6%) and middle- and low-income countries (84.3%) compared to recovery rates for corporate debt (50-60%).
This makes expected losses on infrastructure debt in high-income countries very low at 0.5% of the debt value – lower than 1.1% for an A-rated investment-grade security. Although the expected losses in middle- and low-income countries (2.5%) are higher than threshold for investment-grade securities (2.2%), they are remarkably declining for newer infrastructure debt and exhibiting investment-grade performance in various of these countries.
Infrastructure debt shows a consistent better performance than non-infrastructure debt. While debt performs better in high-income countries than in middle- and low-income countries, it performs better than non-infrastructure debt in all country income groups. In addition, its performance keeps improving over time, with newer infrastructure debt reaching investment grade faster than older infrastructure debt.